Oil prices fell dramatically earlier in the week after Israel’s limited response to Iran’s missile attack convinced markets that a significant escalation in the conflict was unlikely.
Iran’s Supreme Leader Ayatollah Ali Khamenei helped ease tensions on Sunday.
West Texas Intermediate fell to $68.01 early Sunday morning from $71.78 on Friday. Brent crude futures, meanwhile, fell back to $73, down from $76.05 on Friday to below $72.
The geopolitical risk premium in oil markets rose dramatically when Iran fired nearly 200 ballistic missiles at Iran in response to Israel’s killing of Hamas political leader Ismail Haniyeh in Tehran.
The relatively limited scope of Saturday’s attack helped ease tensions in the region after weeks of speculation about how Israel would respond, including reports that it might target oil and gas facilities in Iran.
At 02:15 local time on Saturday, Israel launched what it described as “precise and targeted” airstrikes on Iran. According to BBC“Targets include Iran’s air defenses, as well as missile and drone production and launch facilities.” The Iranian military has confirmed that 4 soldiers were killed in the attack.
The US described the attack as a “defensive exercise” after President Biden urged Israel not to target any oil infrastructure or nuclear facilities.
The day after the attack, Iran’s Supreme Leader signaled that any retaliation by Iran would be measured. Add that “Neither exaggerate nor underestimate the evil nature of the Zionist regime”.
This relative cooling of tensions between Israel and Iran has reduced the risk of a major supply disruption in the region, leading oil markets to focus on fundamentals. Excess spare capacity will only add downward pressure on oil prices.
Opinion in oil markets appears to be unanimous on the direction of prices in the short term, with Andy Libo, president of Libo Oil Associates. CNBC “It may now be difficult to see Brent crude oil prices reaching $80 in the near future”.
ING’s Warren Patterson and Eva Manthe and MST Marquee’s Saul Kavonic both see Israel’s limited attacks as opening the door to expansion. This causes markets to focus on excess supply and sluggish demand.
Even before the latest developments, Goldman Sachs had warned of limited upside in oil prices in 2025, citing spare capacity and weak demand.
While the risk of a major supply disruption in the Middle East is by no means on the cards, demand – particularly China’s economy – can be expected to be at the heart of oil markets ahead of the US election.
Josh Owens for Oilprice.com
